Market Economics | Interest Rate Strategy - BNP PARIBAS ...

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• There is little visibility on the costs Greek banks face in the secured or unsecured funding markets. Broader measures of funding stress, such as BOR-OIS in the eurozone as a whole, have been inching up in recent weeks (Chart 4). However, from a long-term perspective, they are still subdued relative to the levels recorded during the financial crisis (Chart 5). Note that we use Euribor future contracts rather than spot fixings because, as a traded security, they are more liquid. • The impact on Greek bank debt securities differs by instrument, but there is evidence of a parallel sell-off (Chart 6). • In part this reflects a rising expectation of default – evident in rising CDS prices for single name banks (Chart 7). There has also been a large rise in CDS for Portuguese banks (Chart 8) with smaller gains for Irish and Spanish institutions (Charts 9 and 10). • Indicators of funding conditions at ECB liquidity operations are presented at an aggregate level. As highlighted by our interest rate strategists, data on the recent ECB auctions have shown some possible signs of a modest increase in stress. • The first variable rate 3m tender since the end of 2008 was conducted at the end of April. Despite a generous EUR 15bn allotment scheduled, the average bid rate was dragged up to 1.15% with at least one bid recorded at 1.5%, 50bp above the minimum bid rate and just 25bp below the cost of using the lending facility. • In addition, at the most recent main refinancing operation, despite over EUR 200bn of excess liquidity in the eurosystem, the allocation increased to EUR 90bn, EUR 15bn up on the previous week, with 76 bidders –10 higher than the previous week. • While this needs to be kept in perspective – the number of bidders was in the hundreds as recently as the end of 2009, the results of future auctions are worth keeping an eye on. • Some signs of rising tensions are evident in additional measures such as the volatility implied in swaption contracts and swap spreads. In sum, there are increasing signs of tension not just in the sovereign funding markets, but in the banking sector too. This is inevitable – the financial crisis demonstrated that it is the sovereign that ultimately back-stops the financial system. Sovereign risk is already wrapped up with banking sector risk in Ireland, for example. This is why sovereign funding crises are so dangerous – pressures on liability refinancing ripple beyond the obligations of the state. Chart 4: BOR-OIS: Rolling Euribor Contracts I 50 45 1st position 40 35 30 25 3rd 20 2nd 15 BOR (Euribor Futures) - OIS Spread 10 5 0 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Source: Bloomberg Chart 5: BOR-OIS: Rolling Euribor Contracts II 160 BOR (Euribor Futures) - OIS Spread 140 1st position 120 100 2nd 80 60 40 3rd 20 0 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Source: BNP Paribas Chart 6: Bank Cash Bullet Bonds 105 EFG 4 & 3/8% 02/2013 Alpha 3 & 7/8% 09/2012 100 95 90 85 NBG 3 & 7/8% 10/2016 80 75 Bullet Cash Bonds Piraeus 4% 09/2012 70 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 Source: BNP Paribas Eoin O’Callaghan 7 May 2010 Market Mover 12 www.GlobalMarkets.bnpparibas.com
Chart 7: Greek Bank CDS* 900 Greece Bank CDS 5yr Senior (bp) 800 700 600 500 400 300 200 EFG NBG 100 0 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Source: BNP Paribas *banks presented had CDS prices available Chart 8: Portuguese Bank CDS* 500 Portugal Bank CDS 5yr Senior (bp) 450 400 350 300 250 200 BCP Espirito Santo 150 100 50 Caixa Banco BPI 0 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Source: BNP Paribas *banks presented had CDS prices available Chart 9: Irish Bank CDS* Chart 10: Spanish Bank CDS* 700 600 600 Ireland Bank CDS 5yr Senior (bp) 500 Spanish Bank CDS 5yr Senior (bp) 500 400 300 Bank of Ireland Allied Irish 400 300 Sabadell Pastor 200 200 Popular 100 Irish Life & P 0 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Source: BNP Paribas *banks presented had CDS prices available 100 BBVA Santander 0 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Source: BNP Paribas *banks presented had CDS prices available Chart 11: Eurozone Swap Spreads Chart 12: Eurozone 5y5y ATM Swaption Vol 140 120 Swap Spreads (bp) 2y 91 86 EUR 5y5y ATM Normal Swaption Vol 100 81 80 76 60 5y 71 40 5y 66 20 10y 61 0 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 Source: BNP Paribas 56 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Source: BNP Paribas Eoin O’Callaghan 7 May 2010 Market Mover 13 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: UK: all eyes on the election US: re
Page 5 and 6: Event response The ECB is being ove
Page 7 and 8: Eurozone Periphery: Compare and Con
Page 9 and 10: over 20% in Q1) and, last but not l
Page 11: Market Stress Charts • Signs of s
Page 15 and 16: • The plan also contains a number
Page 17 and 18: Germany: Downs and Ups • The impa
Page 19 and 20: Retail sales data from month to mon
Page 21 and 22: On inflation, the statement was als
Page 23 and 24: quarterly average of 2.7% in the fi
Page 25 and 26: US Credit: Still the Recovery’s B
Page 27 and 28: Japan: Rising Chance of Sales Tax H
Page 29 and 30: BNP Paribas Surprise Indicator •
Page 31 and 32: UK headline After surprising to the
Page 33 and 34: US: Supply Could Affect Swap Spread
Page 35 and 36: steep curve is typically associated
Page 37 and 38: decline. We continue to maintain ou
Page 39 and 40: Chart 12: 90-119 Day Dlq for FRE 90
Page 41 and 42: the gamma sector for some time now.
Page 43 and 44: EUR: Limited Nervousness at ECB Ten
Page 45 and 46: with the big redemption (EUR 17.7bn
Page 47 and 48: measures are not promptly taken to
Page 49 and 50: Table 1: BNP Paribas' Inflation For
Page 51 and 52: Table 3: BNP Paribas' Inflation For
Page 53 and 54: Table 1: BNP Paribas Carry Analysis
Page 55 and 56: What’s the call? It is relatively
Page 57 and 58: Update on FIN SEN and FIN SUB 5/10y
Page 59 and 60: Germany 10y: Within MT falling wedg
Page 61 and 62: Judging Currencies by Liquidity •
Page 63 and 64:
type of regulation would reduce mon
Page 65 and 66:
Euro Dives • The euro is collapsi
Page 67 and 68:
Currency Spot Trade Recommendations
Page 69 and 70:
Economic Calendar: 7 - 14 May (cont
Page 71 and 72:
Key Data Preview Chart 1: US Payrol
Page 73 and 74:
Key Data Preview Chart 5: UK Manufa
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Key Data Preview Chart 9: French GD
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Key Data Preview Chart 13: US Indus
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Treasury and SAS Issuance Calendar
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Central Bank Watch Interest Rate EU
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FX Forecasts* USD Bloc Q2 '10 Q3 '1
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RESEARCH DISCLAIMERS: IMPORTANT DIS
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